Responding to revised tax liability - Multiple states income

[pratapa]

Hello

For 2017 we filed 'married filing jointly'. We are both primary residents of CA but my spouse had temporarily shifted residence for 6 months in IL and worked there. 

We had filed 'Resident tax return' for CA and non-resident return for IL

In CA return, I failed to mention IL income/taxes paid probably thinking I dont need pay double taxes

Now I have an audit letter from CA  which cites discrepancy between federal and  CA reported federal income and asking to pay taxes on difference amount. I think I made a mistake in CA return not including IL income.

1) We are asked to either pay excess taxes or file protest. Thinking what I should do?
Ideally it seems I should have reported IL income on CA return and then claimed 'out of state income' tax credit because Ive also already paid taxes in IL ?  Can I refile my CA state returns?

2) Actually should we have filed in both states in non-resident status?

[MaryK4 · Accepted solution]

You should prepare a California amended return- you can include the IL income and the Credit for taxes paid to IL which should reduce greatly or eliminate the California deficiency.  You can submit that to CA FTB with the protest and explanation.  

You filed Nonresident Illinois and Resident California correctly.

Please be mindful of the deadlines they give you and call them if you need to request more time.